Costa Rican Officials Feud Over Limiting Currency Gains

Costa Rica’s government and central
bank are divided over measures to rein in Latin America’s best-performing currency this year as growth slows in the $41 billion
economy.

President Laura Chinchilla last night called on the central
bank to reconsider credit limits imposed on banks to cap lending
in both dollars and colones. The central bank has said it won’t
do so until Congress approves legislation raising reserve
requirements on inflows and boosting taxes on interest sent
abroad.

The colon has gained 2.1 percent against the dollar this
year, the most of 17 Latin American and Caribbean currencies
tracked by Bloomberg. The central bank has bought $701 million
since January to stabilize the currency, while the government
has said economic growth in the Central American nation will
fall below its 4 percent forecast for 2013.

“Growth levels in the national and international economy
have fallen and the capital inflows that affected us have
reduced substantially,” Chinchilla said. “For those reasons, I
believe that there is room to revise and modify the adopted
policies at this time.”

Central bank reserves surged to a record $8 billion in
April from $4.8 billion a year earlier as policy makers led by
bank President Rodrigo Bolanos boosted dollar purchases. The
bank bought about $1.3 billion in 2012 as investors attracted to
deposit rates as high as 11 percent invested in the country.

‘Systemic Risk’

Under the credit restrictions put in place in February,
banks that had increases in dollar loans of less than 20 percent
in 2012 were allowed to increase credit in greenbacks by 6
percent and in colones by 9 percent through Oct. 31, when the
measures are due to expire.

Removing credit limits without other restrictions in place
would be risky and leave the country vulnerable to speculative
inflows, Bolanos said.

“The central bank president has publicly said that credit
limits in dollars can be substituted for by other measures that
seek to ensure that the costs of these credits reflect the
systemic risk that they pose to the national economy,” Bolanos
said in a July 10 statement posted on the central bank’s
website.

Chinchilla, who earlier this year called capital inflows
from developed markets in search of higher yields “weapons of
mass destruction,” also urged Congress to approve the bill as
soon as possible.

The Costa Rican Bank Association sent a letter to
Chinchilla last month asking the government to lift the credit
limits to boost economic growth. The restrictions have resulted
in a 7.6 percent decline in manufacturing activity and the loss
of more than 9,700 jobs in the construction sector, Construction
Chamber President Gonzalo Delgado said July 10.

“We are watching with concern the decline in housing
permit requests,” Delgado said, according to a statement posted
on the chamber’s website. “The credit restrictions have had
their first impact on the construction sector.”